This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

January 16, 2012

Downgrades Hit Europe; PIMCO’s Gross Sees Greek Default

EU calls timing of action ‘odd'

Friday the 13th turned out to be very unlucky indeed for the euro zone, as Standard & Poor's downgraded nine countries in the bloc, including triple-A rated France and Austria, and put 14 of the 17 countries on negative outlook.

Only Germany emerged unscathed, and the European Union Commission on Monday called the downgrades' timing "odd." PIMCO's Bill Gross (left) said in a tweet that the action showed countries could fail to meet their obligations, and that Greece was heading for default.

Bloomberg reported that the Friday action by S&P came with a warning that European efforts to stem the debt crisis were inadequate. In a statement, the ratings agency said, “In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone.”

The European Commission said Monday that S&P was wrong to believe that its efforts were too strongly focused on austerity, and criticized the timing of the move. Reuters reported that EC spokesman Olivier Bailly said, "We believe that the EU collectively and the euro area member states individually are taking the necessary action, and have and will continue to take the necessary action to support the EU economy. The idea expressed by the ratings agency that Europe is pursuing a strategy based on a pillar of fiscal austerity alone is a serious misperception."

Bailly added, "We take note indeed of what Standard & Poor's decided last Friday, but we believe, as vice president Rehn and the commission have said, that it is inconsistent on substance and it's really odd as far as the timing is concerned."

Perhaps not quite so odd, as talks between Greece and its creditors broke up without a resolution last week as some creditors appeared to be holding out for complete repayment of debt through triggering of credit default swaps. As reported last week by AdvisorOne.com, a number of hedge funds have invested in Greek debt and some are optimistic that they can receive full repayment by insisting that CDS be triggered. Greece and the eurozone are trying to avoid that, since it would have unforeseen consequences for the currency bloc, substantially escalate the crisis and even force Greece from the group.

There is concern about the focus on austerity measures, however, to the exclusion of steps taken to stimulate growth—particularly Germany's insistence on budgetary discipline. In a Huffington Post report, Bart van Ark, chief economist at the Conference Board, said that investors fear Germany is mistaken in its priorities. Van Ark said that measures to cope with the crisis should first focus on boosting the European Stability Mechanism and suggested that it should be tripled to 1.5 trillion euros ($1.9 trillion) so that it can adequately protect debt-ridden countries. After that, he said, fiscal integration should follow.

Instead, though, van Ark said, Germany is pushing tougher penalties for countries that go beyond their deficit limits. He likened that strategy to a lifeguard insisting a drowning person learn to swim before he will rescue him, and said, "The timing of what they want to do is wrong."